With Dell Buyout Poised to Be Announced Today, the Bromance Between Microsoft and Silver Lake Gets Serious

Of all the complex aspects of the $23 billion leveraged buyout that is set to take PC maker Dell private — which sources said is likely to be announced sometime early today — one of the more interesting parts of the mega-deal is the evolving relationship between software giant Microsoft and private equity powerhouse Silver Lake Partners.

As part of the massive and complicated transaction led by Silver Lake and founder Michael Dell, as reported yesterday by The Wall Street Journal and others, Silver Lake is ponying up $1 billion and Dell a 16 percent stake in the company worth $3.8 billion, as well as $700 million more from his investment firm. There will also be $15 billion in bank debt, too.

Microsoft’s contribution will be to invest about $2 billion in a form of debt from its nearly $64 billion cash kitty. That’s in part to protect its important Windows operating system franchise, which has been under siege as the device market has moved swiftly to a mobile-based one at the expense of PCs.

It’s a big check to write to do so, but one that it’s been willing to consider when it comes to Silver Lake, which has been on both sides of the table with Microsoft in recent years, in big-money transactions.

The most prominent was when Silver Lake was the seller and Microsoft the buyer in the $8.5 billion deal for Skype, the global telephony company, in mid-2011. The all-cash transaction — which many consider a coup in terms of price — was spearheaded by Silver Lake managing director Egon Durban.

The sly and savvy Durban, who operates out of a Sand Hill Road office, had engineered the buying of a 70 percent stake in Skype from eBay in 2009 for only $2.75 billion, fixed a huge legal mess there and then had sold it only 18 months later for a very lucrative markup.

While there was some interest from other possible buyers, like Google, most think Microsoft was the only serious bidder, which made the sale even more of a clear win for Silver Lake.

But there did not seem to be any buyer’s remorse on Microsoft’s part, as it and Silver Lake soon began kibitzing about the possibility of a takeover of Yahoo, which would have rivaled the Dell deal in cost. While it was Silver Lake that was clearly in the lead, with a series of possible deals in mind, one of them included a transaction in which Microsoft would have contributed a significant slug of cash and perhaps other online assets, since it had little interest in directly bidding for Yahoo outright.

As with Dell, Microsoft’s main goal with Yahoo was in protecting one of its key businesses — in this case, search and online advertising — against the relentless march of competitors such as Google.

Due to a number of reasons — most of which were related to Yahoo’s restless shareholders and dithering management and board — the bid never moved forward. But the bond between Microsoft and Silver Lake did.

That was especially true of Durban — who has led many of Silver Lake’s forays into tech and digital media investing, including its recent investment in William Morris Endeavor — and Microsoft CEO Steve Ballmer and CFO Peter Klein.

All three were deeply involved in the Dell deal, several sources said, which was an important relationship, since the addition of Microsoft has been one of the many critical elements to complete it.

Now, as the entire group prepares to take the troubled computer maker private, they have to make the massive financial transaction work in real life, turbocharging Dell to become much more than it has been in recent years against a competitive landscape even more difficult than ever to navigate.

I think the NSA has a job to do and we need the NSA. But as (physicist) Robert Oppenheimer said, “When you see something that is technically sweet, you go ahead and do it and argue about what to do about it only after you’ve had your technical success. That is the way it was with the atomic bomb.”

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